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BRIEF EXERCISES+ EXERCISES + PROBLEMS + IFRS QUESTIONS
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BRIEF Exercises

 

BE. 17-120—Investment in debt securities at premium.

On April 1, 2014, West Company purchased $400,000 of 6% bonds for $415,750 plus accrued interest as an available-for-sale security. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2019.

 

Instructions

(a)   Prepare the journal entry on April 1, 2014.

(b)   The bonds are sold on November 1, 2015 at 103 plus accrued interest. Amortization was recorded when interest was received by the straight-line method (by months and round to the nearest dollar). Prepare all entries required to properly record the sale.

 

 

 

 

BE. 17-121—Investment in debt securities at a discount.

On May 1, 2014, Kirmer Corporation purchased $900,000 of 12% bonds, interest payable on January 1 and July 1, for $843,900 plus accrued interest. The bonds mature on January 1, 2020. Amortization is recorded when interest is received by the straight-line method (by months and round to the nearest dollar). (Assume bonds are available for sale.)

 

Instructions

(a)   Prepare the entry for May 1, 2014.

(b)   The bonds are sold on August 1, 2015 for $565,000 plus accrued interest. Prepare all entries required to properly record the sale.

 

 

 

 

 

BE. 17-122—Investments in equity securities.

Presented below are unrelated cases involving investments in equity securities.

 

Case I.    The fair value of the trading securities at the end of last year was 30% below original cost, and this was properly reflected in the accounts. At the end of the current year, the fair value has increased to 20% above cost.

 

Case II.   The fair value of an available-for-sale security has declined to less than forty percent of the original cost. The decline in value is considered to be other than temporary.

 

Case III.  An equity security, whose fair value is now less than cost, is classified as trading but is reclassified as available-for-sale.

 

Instructions

Indicate the accounting required for each case separately.

 

 

 

 

 

 

Exercises

 

Ex. 17-123—Investment in equity securities.

Agee Corporation acquired a 35% interest in Trent Company on January 1, 2015, for $500,000. At that time, Trent had 1,000,000 shares of its $1 par common stock issued and outstanding. During 2015, Trent paid cash dividends of $160,000 and thereafter declared and issued a 5% common stock dividend when the fair value was $2 per share. Trent's net income for 2015 was $360,000. What is the balance in Agee’s equity investment account at the end of 2015?

 

 

 

Ex. 17-124—Fair value and equity methods. (Essay)

Compare the fair value and equity methods of accounting for investments in stocks subsequent to acquisition.

 

 

 

Ex. 17-125—Fair value and equity methods.

Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Revenue account by each of the following transactions, assuming Crane Company uses (a) the fair value method and (b) the equity method for accounting for its investments in Hudson Company.

                                                                              (a) Fair Value Method         (b) Equity Method    

                                                                             Investment     Dividend    Investment   Investment

            Transaction                                               Account       Revenue                        Account       Revenue

———————————————————————————————————————————

1.   At the beginning of Year 1, Crane bought 25% of Hudson's common stock at its book value. Total book value of all Hudson's common stock was $800,000 on this date.

———————————————————————————————————————————

2.   During Year 1, Hudson reported $60,000 of net income and paid $30,000 of dividends.

———————————————————————————————————————————

3.   During Year 2, Hudson reported $30,000 of net income and paid $20,000 of dividends.

———————————————————————————————————————————

4.   During Year 3, Hudson reported a net loss of $10,000 and paid $4,000 of dividends.

———————————————————————————————————————————

5.   Indicate the Year 3 ending balance in the Investment account, and cumulative totals for Years 1, 2, and 3 for dividend revenue and investment revenue.

———————————————————————————————————————————

 

Ex. 17-126—Comprehensive income calculation.

The following information is available for Irwin Company for 2015:

            Net Income                                                                                $120,000

            Realized gain on sale of available-for-sale securities                    10,000

            Unrealized holding gain arising during the period on

                  available-for-sale securities                                                     34,000

            Reclassification adjustment for gains included in net

                  income                                                                                       8,000

 

Instructions

(1)   Determine other comprehensive income for 2015.

(2)   Compute comprehensive income for 2015.

 

 

 

*Ex. 17-127—Fair value hedge.

On January 2, 2015, Tylor Company issued a 4-year, $600,000 note at 6% fixed interest, interest payable semiannually. Tylor now wants to change the note to a variable rate note. As a result, on January 2, 2015, Tylor Company enters into an interest rate swap where it agrees to receive 6% fixed and pay LIBOR of 5.6% for the first 6 months on $600,000. At each 6-month period, the variable interest rate will be reset. The variable rate is reset to 6.6% on June 30, 2015.

 

Instructions

(a)   Compute the net interest expense to be reported for this note and related swap transaction as of June 30, 2015.

(b)   Compute the net interest expense to be reported for this note and related swap transaction as of December 31, 2015.

 

*Ex. 17-128—Cash flow hedge.

On January 2, 2014, Sloan Company issued a 5-year, $9,000,000 note at LIBOR with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first year is 6.8%

 

Sloan Company decides it prefers fixed-rate financing and wants to lock in a rate of 6%. As a result, Sloan enters into an interest rate swap to pay 7% fixed and receive LIBOR based on $9 million. The variable rate is reset to 7.4% on January 2, 2015.

 

Instructions

(a)   Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2014.

(b)   Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2015.

 

 

 

PROBLEMS

 

Pr. 17-129—Trading equity securities.

Korman Company has the following securities in its portfolio of trading securities on December 31, 2014:

                                                                                                            Cost                    Fair Value

5,000 shares of Thomas Corp., Common                                 $151,000               $139,000

10,000 shares of Gant, Common                                                182,000                 190,000

                                                                                                         $333,000               $329,000

 

All of the securities had been purchased in 2014. In 2015, Korman completed the following securities transactions:

March 1     Sold 5,000 shares of Thomas Corp., Common @ $31 less fees of $1,500.

April 1        Bought 600 shares of Werth Stores, Common @ $45 plus fees of $550.

 

Pr. 17-129  (cont.)

The Korman Company portfolio of trading securities appeared as follows on December 31, 2015:

                                                                                                            Cost                    Fair Value

10,000 shares of Gant, Common                                              $185,000               $195,500

600 shares of Werth Stores, Common                                          27,550                   25,500

                                                                                                         $212,550               $221,000

 

Instructions

Prepare the general journal entries for Korman Company for:

(a)     the 2014 adjusting entry.

(b)     the sale of the Thomas Corp. stock.

(c)     the purchase of the Werth Stores' stock.

(d)     the 2015 adjusting entry.

 

 

 

 

Pr. 17-130—Trading equity securities.

Perez Company began operations in 2013. Since then, it has reported the following gains and losses for its investments in trading securities on the income statement:

 

                                                                                                         2013            2014            2015    

Gains (losses) from sale of trading securities                            $ 15,000       $(20,000)    $ 14,000

Unrealized holding losses on valuation of trading securities        (25,000)             —           (15,000)

Unrealized holding gain on valuation of trading securities                 —             10,000             —

 

At January 1, 2016, Perez owned the following trading securities:

                                                                                                            Cost    

            BKD Common (15,000 shares)                                           $450,000

            LRF Preferred (2,000 shares)                                               210,000

            Drake Convertible bonds (100 bonds)                                   115,000

 

Pr. 17-130  (cont.)

During 2016, the following events occurred:

1.   Sold 5,000 shares of BKD for $170,000.

2.   Acquired 1,000 shares of Horton Common for $40 per share. Brokerage commissions totaled $1,000.

 

At 12/31/16, the fair values for Perez's trading securities were:

            BKD Common, $29 per share

            LRF Preferred, $110 per share

            Drake Bonds, $1,020 per bond

            Horton Common, $45 per share

 

Instructions

(a)    Prepare a schedule which shows the balance in the Fair Value Adjustment (trading) account at December 31, 2015 (after the adjusting entry for 2015 is made).

(b)    Prepare a schedule which shows the aggregate cost and fair values for Perez's trading securities portfolio at 12/31/16.

(c)    Prepare the necessary adjusting entry based upon your analysis in (b) above.

 

 

Pr. 17-131—Available-for-sale equity securities.

During the course of your examination of the financial statements of Doppler Corporation for the year ended December 31, 2015, you found a new account, "Investments." Your examination revealed that during 2015, Doppler began a program of investments, and all investment-related transactions were entered in this account. Your analysis of this account for 2015 follows:

Doppler Corporation

Analysis of Investments

For the Year Ended December 31, 2015

Date—2015                                                                                                     Debit                 Credit 

(a)

                  Harmon Company Common Stock

Feb.    14   Purchased 4,000 shares @ $55 per share.                               $220,000

July    26   Received 400 shares of Harmon Company common stock

                  as a stock dividend. (Memorandum entry in general ledger.)

Sept.   28   Sold the 400 shares of Harmon Company common stock

                  received July 26 @ $60 per share.                                                                    $24,000

(b)

                                                                                                                        Debit                 Credit 

                  Taber Inc., Common Stock

Apr.    30   Purchased 20,000 shares @ $40 per share.                             $800,000

Oct.    28   Received dividend of $1 per share.                                                                   $20,000

 

Additional information:

1.   The fair value for each security as of the 2015 date of each transaction follow:

      Security                            Feb. 14            Apr. 30            July 26           Sept. 28           Dec. 31

      Harmon Company               $55                                          $62                  $60                  $64

      Taber Inc.                                                     $40                                                                    33

      Doppler Corp.                        25                    28                    30                    33                    35

 

2.   All of the investments of Doppler are nominal in respect to percentage of ownership (5% or less).

 

3.   Each investment is considered by Doppler’s management to be available-for-sale.

 

Instructions

(1)   Prepare any necessary correcting journal entries related to investments (a) and (b).

(2)   Prepare the entry, if necessary, to record the proper valuation of the available-for-sale equity security portfolio as of December 31, 2015.

 

 

*Pr. 17-132—Derivative financial instrument.

Hummel Company purchased a put option on Olney common shares on July 7, 2014, for $100. The put option is for 200 shares, and the strike price is $30. The option expires on January 31, 2015. The following data are available with respect to the put option:

 

                     Date                     Market Price of Olney Shares       Time Value of Put Option

         September 30, 2014                  $32 per share                                         $52

         December 31, 2014                   $31 per share                                           22

         January 31, 2015                       $33 per share                                             0

 

Instructions

Prepare the journal entries for Hummel Company for the following dates:

(a)     July 7, 2014—Investment in put option on Olney shares.

(b)     September 30, 2014— Hummel prepares financial statements.

(c)     December 31, 2014— Hummel prepares financial statements.

(d)     January 31, 2015—Put option expires.

 

 

 

 

*Pr. 17-133—Free-standing derivative.

Welch Company purchased a put option on Reese common shares on July 7, 2015, for $215. The put option is for 300 shares, and the strike price is $51. The option expires on July 31, 2015. The following data are available with respect to the put option:

 

                  Date                        Market Price of Reese Shares      Time Value of Put Option

         March 31, 2015                          $49 per share                                       $120

         June 30, 2015                            $50 per share                                           56

         July 6, 2015                               $46 per share                                           21

 

 

*Pr. 17-133  (cont.)

 

Instructions

Prepare the journal entries for Welch Company for the following dates:

(a)     January 7, 2015—Investment in put option on Reese shares.

(b)     March 31, 2015— Welch prepares financial statements.

(c)     June 30, 2015— Welch prepares financial statements.

(d)     July 6, 2015— Welch settles the put option on the Reese shares.

 

 

 

IFRS QUESTIONS

True/False

1.   IFRS requires that gains and losses on available-for-sale securities be reported directly in equity.

 

2.   Under IFRS, impairment charges related to held-for-collection debt securities may be reversed.

 

3.   Reclassification in and out of trading securities is permitted under IFRS, although this type of reclassification should be rare.

 

4.   IFRS requires that Company A consolidate Company B when it controls and owns at least 50% of Company B.

 

5.   Under IFRS, both the investor and the investee should follow the same accounting practices, requiring adjustments be made to the investor’s books in order to prepare financial information.

 

 

Multiple Choice

 

6.   Match the approach and location where gains and losses from available-for-sale securities are reported:

                                                     Location where gains/

           Approach                          losses reported_    __

a.          GAAP                                       Equity

b.          IFRS                                         Equity

c.          GAAP                                       Income

d.          IFRS                                Comprehensive income

 

 

Use the following information for questions 7 and 8

 

Rushia Company has an available-for-sale investment in the 10%, 10-year bonds of Pear Company The investment’s carrying value is $3,200,000 at December 31, 2014. On January 9, 2015, Rushia learns that Pear Company has lost its primary manufacturing facility in an uninsured fire. As a result, Rushia determines that the investment is impaired and now has a fair value of $2,300,000. In June, 2016, Pear Company has succeeded in rebuilding its manufacturing facility, and its prospects have improved as a result.

 

    7.     If Rushia Company determines that the fair value of the investment is now $3,900,000 and is using U.S. GAAP for its external financial reporting, which of the following is true?

a.   Rushia is prohibited from recording the recovery in value of the impaired investment.

b.   Rushia may record a recovery of $900,000.

c.   Rushia may record a recovery of $700,000.

d.   Rushia may record a recovery of $1,600,000.

 

    8.     If Rushia Company determines that the fair value of the investment is now $2,900,000 and is using IFRS for its external financial reporting, which of the following is true?

a.   Rushia is prohibited from recording the recovery in value of the impaired investment.

b.   Rushia may record a recovery of $600,000.

c.   Rushia may record a recovery of $900,000.

d.   Rushia may record a recovery, but is limited to 80% of the value of the recovery.

 

 

 

 

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